Revamped GST structure, RBI's credit registry, and UPI 2.0 will solve shortage of data for lenders, says Sharma
Bengaluru: Out of the 8.8 million businesses in India that file taxes, at least 6.6 million businesses do not have access to the credit sources such as banks, non-banking financial companies (NBFCs), and upcoming online lenders. This is a problematic situation for both lenders, and for businesses (especially small businesses), looking for capital loans.
Sometimes, small businesses fall short of working capital, while traditional avenues to borrow money—banks and NBFCs—may not always work out. Businesses instead depend on family, friend, or other close sources for loans, and this is changing gradually as lending institutions and online lenders have started to mine useful data on potential borrowers in order to make better credit decisions.
Speaking at the third edition of Mint Fintech Summit 2018, Sharad Sharma, co-founder of the Indian Software Products Industry Round Table (iSpirt), pointed out that lack of valuable data on businesses is one of the biggest roadblocks for lenders while underwriting loan applications. Several small businesses fail to meet credit risk standards set by lending institutions either due to unavailability of credit history of the borrower or because there isn’t just enough accurate data.
The problem of credit shortage for small businesses is daunting, but the regulators in India have already set things in motion to address the issue. According to Sharma, the revamped goods and services tax (GST) structure, the Reserve Bank of India’s (RBI’s) new public credit registry (PCR) initiative, and UPI (Unified Payments Interface) 2.0 will solve the shortage of data for lenders.
“When a customer approaches an online lender, the customer should be able to put his best foot forward so that the lender can give him a loan. The flip side of this is solving information asymmetry from point of view of the lender. This means: How does a lender get to see some important information of the customer, that the customer may not be interested in sharing?" asked Sharma during the event on Wednesday.
One answer to this information asymmetry faced by lenders is RBI’s forthcoming public information repository that collates all loan information of individuals and corporate borrowers. Lenders will soon be able to price interest rates variably, based on the loan history of the borrower. A good borrower will get a lower interest rate for his loan, while a bad borrower will have biggest interest, but the point is that a borrower cannot be turned away just because he has no data.
Sharma added that the public registry will sit below existing data sources such as credit bureaus. “The lender can go to the PCR directly instead of relying only on credit bureau information. PCR and Account Aggregator are the two sides of the same coin: the borrower liberating their data…and the lender being able to see some very limited amount of information (on the borrower), so that the lender can make better credit decisions," added Sharma.
However, lenders will need to change how they build credit products, when traditional methods of underwriting loans is being replaced. “The implication for the fintech industry is that, they will have to think about new loan products and even new digital financial products. The products that we have today are not appropriate for the changing market that we are going through," said Sharma.